Free & Clear: October 2013

Getting more than you pay forBy John Hood

You get what you pay for” sounds like good advice. Its persuasive appeal explains why so many use it, from helpful grandpas to ambitious politicians.For example, critics claim the General Assembly underfunded education this session. “The saying ‘you get what you pay for’ is truer than many of our legislators would like to believe,” a Wilmington StarNews editorial opined. But sounding wise is not the same as dispensing wisdom. In a wide range of situations, from personal finances to public policy, the notion is divorced from reality.

If we just get what we pay for, why do so many spend so much time shopping for bargains? We scrutinize circulars and websites for the best price on consumer goods. We spend Fridays on eBay, Saturdays at yard sales and Sundays watching reruns of Pawn Stars and Antiques Roadshow because we are fascinated with the idea of buying low and selling high. If I find an antique clock at a yard sale for $10, is that all it will ever be worth? What if Rick Harrison is willing to pay me $100?

There’s a difference in quality between a Ford Focus and a Rolls Royce. But if you are in the market for an inexpensive used car for your 16-year-old, you might opt for a $7,000 vehicle over a $7,500 one without thinking you’re passing up a superior option. When it comes to personal finances, we equate how much we spend with the value of what we buy only when the price difference is large and posted for all to see. We don’t assume that a 75-cent can of beans is inferior in some critical way to an 80-cent can or that an $80,000 sports car is to a $75,000 one.

This points to a more fundamental problem with “you get what you pay for.” It clashes with the basic laws of economics. When people transact business in the marketplace, each seeks a net gain. All transactions are costly — you have to prep what you want to sell, advertise it, find interested parties, negotiate and then make the deal. People don’t voluntarily do this unless they expect to come home with something more valuable to them than the resources or labor they traded for it.

Imagine your apple tree has been especially fruitful, leaving you a basket of fruit you’ll never eat. You take it to the farmers market, where someone is willing to pay $20 for it. That doesn’t mean the apples are objectively worth $20. Prices reflect the reality that value is subjective. They’re worth less than $20 to you. That’s why you sold them. They’re worth more than $20 to the buyer. That’s why he bought them. Both of you leave better off than you started.

Writ large, that’s what makes economic progress possible. If we just traded items of objectively equal value, there would be no net gain in productivity or efficiency. Economics would be a zero-sum game. Because we differ in abilities, skills, resources and subjective valuations, we bargain our way to arrangements that make us better off. We quite literally get more than we pay for. That’s how living standards rise.

Perhaps the worst abuse of the phrase occurs in politics. When one wants to complain that a program is underfunded, he laments “you get what you pay for.” That’s untrue. Localities, states and nations differ widely in both public expenditure and quality of public services. Some public-school systems, for example, have higher-than-average expenditures and better-than-average graduation rates or test scores. Some have high spending and low outcomes, low spending and high outcomes, or low spending and low outcomes.

If the quality of public services were entirely determined by tax money spent, there would be no such thing as efficiency, innovation or economies of scale in government. Not even the most cynical libertarian believes that. We all know that hiring 15 people to fix a pothole will not necessarily get it done 50% faster than hiring 10 for the job.

In government, as we do in our personal and professional lives, officials should shop for bargains. They should embrace new technologies, innovative management practices and other ways to boost the productivity of spending on education, health care, transportation and other services. Government might never post a gain as dramatic as that of computing power, which costs a fraction of what it did a generation ago. But taxpayers should never have to settle for no gain.

John Hood is chairman and president of the John Locke Foundation. You can reach him at jhood@johnlocke.org.